Market Research: Expense or Investment?
November 17, 2007
Custom market research costs money. How much depends on the scope and complexity of the work to be done and the format in which the findings and recommendations will be delivered.
Some companies, especially smaller ones, tend to view market research as an expense. By that I mean that when they’re considering whether or not to conduct a research study, much of their attention is focused on the cost. "Can we afford to do this?", or, "Can we get the price down?" That sort of thing.
In my experience, companies that focus on the expense of market research don’t pay enough attention to the impact that the research can have on their business. They "control" the cost, but fail to get as much benefit as they could.
Research as an Investment
It may be more useful to view market research as an investment. You’re investing in research up front so that your company can earn or save more money later. Like any other investment, you need to evaluate market research on the basis of its ROI. Here’s how that might be expressed:
Value of Research ÷ Cost of Research = ROI
If the result is greater than 1, it could be worth it for you to do the research. The higher the ROI, the more seriously you should consider funding the project.
If the ROI is less than 1, you’ll need to figure out how to increase the value of the research, or how to reduce its cost. If you can’t get the ROI to an acceptable level, you probably shouldn’t proceed with the research study.
Unless the project is unusually large or complex, you may be able to estimate the cost fairly easily. You and the company who will be doing the research can work together to develop a preliminary scope-of-work. Based on those specifications, the research firm can give you a budgetary estimate of their fee. Add to that any expenses that might be incurred by your internal project team and you’ll have the denominator for your ROI calculation.
Quantify the Value
Quantifying the value of market research means that you determine its financial impact on your company. This may not be easy to do, but it’s really important.
When companies initiate market research projects without having specific financial goals in mind, it can be more difficult for those involved in the work to stay focused on the things that will yield the greatest benefit. It can also lead to situations where nobody in the company makes use of the research to improve performance.
Here are several examples of financially-oriented goals that could be used to calculate a market research ROI:
- We need to reduce our material costs by 15%. This research will identify at least three qualified suppliers in China who will hit our target prices.
- We need to put salespeople in Vietnam ahead of our competition. This research will give us a good idea of how many we need, where they should be located, how much they will cost, and how much revenue they can be expected to generate during the first two years.
- We need to set up a factory in India. This research will compare several industrial parks and enable us to identify the one with the lowest total cost to our company.
By projecting the financial impact of the research, and calculating the ROI, you can be much more objective about whether or not to move ahead with the project. And when you decide to go forward, you’ll have a clear and measurable expectation of the outcome.